Impact of Foreign Ownership on Performance: Evidence from China

Impact of foregin ownership on PERFROMANCE; EVIDANCE fromChina
[Document subtitle]
OCTOBER 10, 2021
Abstract:
This thesis has attempted to examine the Direct effect of Foreign Ownership On Firm
Performance In China.
Data and Methodology: Data of 625 publicly listed stocks both in (SSE)or Shanghai Stock
Exchange & (SZSE) Shenzhen Stock Exchange over the period of 5 years 2015-2019, A total
of 3125 years of data.
Findings: There is no significant relationship between Foreign ownership and firm
performance. Secondly, in terms of firms characterises, In China the age of the firms is found
to be positively related with the performance.

Table of Contents
Table of Contents..........................................................................................................................1
1.1 Background of the study..........................................................................................................4
1.2 Research problem....................................................................................................................5
1.3 Research Questions and Objectives.........................................................................................8
1.3.1 Research Questions...................................................................................................................8
1.3.2 Research Objectives..................................................................................................................8
1.4 Justification of the study in China context..............................................................................8
1.5 Scope of the study....................................................................................................................9
1.5.1 The Scope of study...................................................................................................................9
1.5.2 Research methodology..............................................................................................................9
1.6 Structure of the Study.............................................................................................................9
CHAPTER 2: LITRATURE REVIEW.......................................................................................10
2.1 Introduction...........................................................................................................................10
2.2 Theoretical Framework.........................................................................................................10
2.2.1 Direct Impact of Foreign Ownership on Firm Performance....................................................10
2.2.1.1 The Eclectic Paradigm.........................................................................................................10
2.2.1.2 Variables of Eclectic Paradigm............................................................................................11
A) Ownership-specific Advantages.............................................................................................11
B) Location Specific Advantages................................................................................................12
C) Internalization advantages......................................................................................................12
2.3 The Resource-based Theory..................................................................................................13
2.4 The Relationship Between FO and Firm Performance..........................................................14
2.4.1 Linear Relationship.................................................................................................................14
2.4.2 Non-Linear Relationship.........................................................................................................16
2.4.3 No Relationship......................................................................................................................17
2.5 Firm Performance.................................................................................................................18
2.6 Conclusion.............................................................................................................................19
CHAPTER 3: RESEARCH METHODOLOGY.........................................................................20
3.1 Introduction...............................................................................................................................20
3.2 Data...........................................................................................................................................20
Table 3.2.1: Descriptive Measures of the key variables...............................................................21
Table 3.2.2: Descriptive Statistics................................................................................................21
3.3 Direct Effect of Foreign Ownership on Firm Performance........................................................22
3.3.1 The Variables......................................................................................................................23
3.4.1 Empirical Model.................................................................................................................26
CHAPTER 4: DATA ANALYSIS.........................................................................................................27

4.0Introduction............................................................................................................................27
4.1 Statistical analysis...................................................................................................................27
4.2 Hypothetical framework.........................................................................................................28
4.2.1 Hypothesis 1:..........................................................................................................................29
4.2.2Data analysis through regression equation.............................................................................29
Model Summary..........................................................................................................................29
4.2.2.1 Interpretation of the results............................................................................................30
4.2.2.2 Analysis of Variance.........................................................................................................31
4.2.2.3 Interpretation of the Coefficient......................................................................................32
4.3 Hypothesis 2..............................................................................................................................34
4.3.1 Interpretation of the results...................................................................................................35
4.3.2 Analysis of Variance................................................................................................................35
4.3.4 Interpretation.........................................................................................................................36
CHAPTER – 5 DISCUSSION ON THE FINDINGS..................................................................................39
5.0 Impact of Foreign ownership on Chinese listed firms................................................................39
5.1 Positive relationship(U-shape)...................................................................................................39
CHAPTER 6: CONCLUSION AND RECOMMENDATIONS...................................................................41
6.0 Conclusion.................................................................................................................................41
6.1 Implication of the study.............................................................................................................42
6.2 Limitations and strength............................................................................................................42
6.3 Recommendations.....................................................................................................................43
References...................................................................................................................................44

Acknowledgment

1.1 Background of the study
In the past 2 decades Foreign Direct Investment (FDI) and Portfolio Investment (PI) has
completely changed world economic system. China became one of the most attractive
destinations for Foreign Direct Investment (FDI) amidst global economy slowdown and
political uncertainty in other countries. According to a UNCTAD report, in 2020, China
attracted US$161bn of FDI compared to US$141.2bn in the previous year indicating a 11%
increase in FDI (Thematic Report, 2020).
Figure 1-1: Level of FDI in China from 2005-2019
(Source: Thematic Report, 2020)
Figure 1 above depicts the rise of FDI in China for the past 15 years. A noticeable increase in
outward FDI in the recent years indicates China might become a less favourable destination
for FDI in the future. However, China has made itself a more investment-friendly destination
with reforms to legislations and protecting shareholders’ rights. China was ranked 31st out of
190 countries in the World Bank’s Ease of Doing Business ranking for 2020. Today, China
remains as the second largest recipient of capital in the world. Similarly, the country was
also ranked as one of the best regulatory performances in the world.
In recent years, the importance of MNCs has grown substantially and many developing
countries are competing to attract more and more FDI and consider it the main engine of their
economy.MNE as ‘an organization which engages in FDI, owns, and controls value-added
businesses in multiple geographical areas’ (Dunnings and Lundan, 2008).

1.2 Research problem
Given the importance of foreign investments as a source of capital, numerous studies have
undertaken the motivation behind FDI and how to attract foreign capital and sustain them
over a period in a host-country through adopting policies. Firstly, determinants and the effect
of FDI are often studied at the country level. For example, a large body of literature exists on
the technology and know-how transfer in the host country. (Bwalya,2005), (Liu,2006),
(Kamal,2015) and (TŐKÉS,2019).
Secondly, the impact of foreign ownership on firm performance has been generally analysed
based on specific industries (Phung and Vyle,2013), (Jusoh,2015) and (Nofal,2020).
However, very few researchers have attempted to analyse the effect of FDI at the firm level,
where the focus is on the impact of foreign ownership and firm performance when compared
to domestic firms in the same country. Furthermore, existing theories and frameworks which
are used to analyse the relationship between FDI, and firm performance provides assertingas
to whether foreign ownership has positive/negative direct or indirect effect on firm
performance.
With regards to the direct effect of foreign ownership, Electric paradigm determines the
impact of competitive advantage according to the patterns of international productions of
(Dunning,1988; Dunnig,2001) over their purely domestic firm. These theories and framework
argue that for a foreign investor to operate outside its home country as a MNC,these three
conditions must be satisfied:
1) unique and sustainable ownership-specific advantages over their domestic
competitors. The extended version of Electric paradigm further breaks it down to Oa
asset-based advantage, and Ot transaction-based advantage.
2) the extent to which the company perceives it is useful to add to its O advantages
rather than to sell them to other foreign firms (Internalization Advantages – “I”).
3) the extent to which companies are interested in creating, accessing, or utilizing their
“O” advantages in a foreign location (Location Advantages – “L”).
Therefore, a firm must have sufficient ownership(monopolistic advantage) to compensate the
cost of operating as a multinational company.

Understanding the dynamic nature of MNCs, (Dunning,2000) further explains that O
advantages are not limited to firm-specific; these capabilities are either created internally or
acquired externally through business networks.
Similarly, L advantages are not restricted to specific geographical region(country-specific); it
can be in the region or even a cluster of regions. Following these theories(Srithanpong,2012)
studied the impact of foreign ownership in Thai companies and concluded that, foreign
ownership positively correlated with higher wage and better management capabilities.Their
conclusions are in line with (Chhibber and Majumdar,1999) where they analysed the impact
of foreign ownership on Indian firms.Similarly, (Anttila et al, 2014) in their paper focused on
the Finnish listed stock and concluded that foreign owned firms in Helsinki stock exchange
tend to show higher labour productivity, superior management skills and greater global
distribution networks.
While growth prospects of MNCs, particularly by addressing country-specific advantages
(CSA) or firm specific and firm specific advantages (FSA) (Rugman,1981) or the theory of
dynamic ownership (Dunning,2001) such as asset-based and transaction-based advantages are
largely unchallenged,we know very little about the causes and the outcomes of these
advantages at the firm level.
Adding to that complexity of the relationship, the level of ownership has also its own
complexities.For example, in the case of the Turkish economy, firms with more than 51%
tend to negatively affect return on asset (RoA) while firms with low foreign percentage show
a positive relationship with performance (Yavaş and Erdoğan, 2016). But in the case of
Vietnamese listed firms, foreign ownership lower than 50% has negative impact on the firm
performance when compared to domestic firms (Phung and VyLe,2013).The following
conclusion can be made on these findings: firstly, the relationship between performance and
foreign ownership is nonlinear. Secondly, country specific advantages might not be very
scientific as the country might have some specific disadvantages as we have seen in the case
of Vietnamese firms where foreigners are limited to only 49% shares and are not able to
increase their shares beyond that.
Lastly, the direction and the shape of the relationship between foreign ownership and firm
performance further widen the gap. There is no relationship between performance and
ownership (Tawfeeq and Abdullah), inverted U-shape relationship, if foreign ownership
increases beyond 36.26% it negatively affects company performance (Phung et al.,2021). U-

shape relationship firms with less than 50% foreign shares perform better than domestic firms
but firms with more than 50% foreign ownership tend to destroy value and negatively affect
RoA (Gurbuz and Aybars,2010) and direct and positive relationship(Douma, George and
Kabir,2006).
Therefore, the lack of strong evidence on the impact of foreign ownership on firm
performance raises questions on the benefits of foreign investments in a country. While there
is strong competition among firms in China to attract foreign investments, the real
performance of these investments at the firm-level, and degree of effectiveness are yet to be
explored. Most of the previous papers have recommended country specific policies such to
avoid increasing foreign shares to control knowledge and technology transfer from the
country of origin (Ylä,2004). On the other hand (Anil and Mishra,2014) suggest that
Australian firms should encourage more foreign investments to diversify their risk.
Implementing certain polices at the firm level may not be possible in the case of Chinese
firms as they are bound to obey country and state level policies. To the best of the author’s
knowledge, there is no study, to date, that has examined the relationship between foreign
ownership, the optimal level of ownership and performance in China.While taking into
consideration the possibility of a direct/indirect or even non-linear relationship. Technology
spill over and managerial improvements are considered as the indirect impact of foreign
ownership, potential endogeneity across the firms in the sample. Thus, to address this
research gap, this study intends to fully consider all factors in assessing the relationship
between foreign ownership and firm performance among Chinese firms, thereby ensuring
robust and reliable results.
1.3 Research Questions and Objectives
1.3.1 Research Questions
The main question of this study is to find out:
To what extent foreign ownership affects a firm’s performance in the context of
China?
The main research questions will be answered by exploring firm characteristics through
following secondary questions:
 To what extant size affect firm performance?
 To what extent ownership-level affect firm performance?